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Super Thursday is here – With the release of over 40 different data pieces due out, the effect on currency markets is expected to be dramatic.

Keys of the week:

Four of the five largest central banks in the world meet this week – the Fed, BoE, the SNB and the ECB. From a market moving position – one (Fed) possibly two (BoE) will increase their respective cash rates to their highest levels in the post-GFC era.

US CPI data – in many respects the Fed’s ‘forgotten’ mandate – has been unable to hold at the desired 2% level. The consensus forecast for November is for core CPI to decline to 1.7% from 1.8% – 30 basis points off the 2% mandate – Something Jerome Powell is likely to highlight in 2018 and a possible reason for slowing the rate rise cycle.

Australian employment data – in the 12-months to November Australia has added 355,000 jobs, the majority of which are full time. Expectations for Thursday’s release are for another very solid month – consensus estimates are for 17,500 jobs to be added in the month November – bullish and may see a very short spike in the AUD.

The stance of Australian fiscal policy – the Mid-Year Economic and Fiscal Outlook (MYEFO) is also due this week and will see Treasurer Scott Morrison in full voice – one of the keys to MYEFO will be the average pricing of bulks, particularly iron ore -the forecasted average prices are under the actual average prices. Here is the stat that matters – for every US$1 over the forecasted average price in iron ore it adds approximately $250 million to the Budget bottom line.

Economic data has been a key influence on the AUD particularly last week as GDP and the trade balance figures hit the wires – leaving it teetering on a two-year trend line. Therefore, all eyes turn to the Fed.

The Fed – Data points

Interest rates – The target rate will be set at 1.5% come Thursday making it the fourth rate rise in the past 12 months and fifth increase in two years. It will also be the third December in a row the Fed has increased rates – a bit of coal from the Fed for Christmas? Looking at the Fed from a trade perspective – if it wasn’t to move this week the market fallout would be enormous as it would shatter the market’s belief in the communications from Washington and would highlight that even with the current economic strength in the US – the Fed isn’t confident enough to return the Federal Funds rate to ‘neutral’ – would see the USD tanking against everything.

The Dot Plots – As the chart shows the Board is forecasting the target rate to be at 2%-2.25% come the December 2018 – Market is a 1.5% to 1.75% with only a 70% change on one rise next year down from 1.5 rate rises – which way will the gap close? Yellen is the catch here – as she is no longer the future of the FOMC the December plots may not have as much effect as before with Powell is expected to be more Dovish than the current Chair. Might have to wait for February for the dot plots to take full effect.

(Source Bloomberg)

The trade-centric point

The trade-centric point

For the first time in 18 years the Federal funds rate will be the same as Australia’s cash rate. Furthermore – sometime in the New Year it will surpass the Australian cash rate. This is an AUD detractor for the following reasons.

The carry trade has been a huge economic benefit to Australia as it has led to large foreign inflows – particularity from the like of the Japanese who are some of the best yield chasers in the world. With the Australian 10-year at 2.5% – JGBs around 0.1% it makes complete sense.

Currently US 10-year at 2.36% factor in Thursday’s 25-basis point increase under theory, the 10-year should increase to ~2.6% putting the Australian carry trade position under strain and increases the likelihood of capital outflows as carry traders look to the US.

AUD/USD hit a low of 72.3c post the December Fed meeting in 2016 – all indicators suggest December 2017 could be the same and more when you factor in the carry trade concern.

Aussie bond market flows are likely to filter into possible equity market outflows. Approximately 47% of funds invested in the ASX come from foreign investors – a US carry trade coupled with a headwind in the foreign investor’s local currency with the AUD falling may see outflows from the ASX as well. Certainly, something to keep an eye on.

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